Policy and Practice

UK: Extension of “failure to prevent” offence to be considered by Whitehall

In response to comments by the SFO director David Green suggesting the extension of the “failure to prevent” offence in section 7 Bribery Act 2010 to other types of economic crime, the UK chapter of the International Chamber of Commerce (“ICC”) wrote recently to the Ministry of Justice, setting out its concerns at such a proposal. The ICC welcomed the fact that the introduction of the section 7 offence had promoted ethical behaviour amongst companies and had prompted many to review and enhance their compliance programmes. However, it noted that the burden of doing so had, for many businesses, been considerable and that there is, as yet, no evidence from which to conclude that the disadvantages experienced by some companies are outweighed by the benefits to others. Despite a plethora of guidance, the lack of any enforcement case under the section so far means that the obligation remains uncertain in many respects.

The ICC commented that the compliance burden of extending the obligation to implement adequate procedures to reduce the risk of all other types of financial wrongdoing could potentially be immense and is unlikely to be proportionate to the risks faced. In addition, the ICC noted that entities in the regulated sector already face compliance obligations with which a new requirement may conflict, or duplicate. Lastly, the ICC raised the concern that overseas companies may be deterred from doing business in the UK, should the potential liability prove too broad and uncertain.

In a short response, the Ministry of Justice has disclosed that it is establishing a cross-Whitehall Steering Group to consider all aspects of David Green’s proposal, including the implications for the existing common law rules on corporate liability. It confirmed that any extension of the “failure to prevent” offence or other changes to the law on corporate criminal responsibility would only be taken after appropriate consultation.

The ICC is therefore of the view that it is highly unlikely that any advance will be made on this proposal before the next general election in May 2015. No mention of reforming the law relating to corporate criminal liability was made in the Queen’s Speech on 4 June 2014. However, the question of whether UK law should move away from the identification doctrine to focus on other models of holding corporations to account was one of the potential future projects for the Law Commission announced in Summer 2013. It is expected that an announcement will be made in the next month or so as to whether this issue will form part of the Law Commission’s work for the next three years.

David Green, director of the SFO, has spoken about the SFO's attitude to companies who are considering self-reporting wrongdoing in more than one jurisdiction, particularly when one of those jurisdictions is the UK or US, where a deferred prosecution agreement (“DPA”) might be available. Speaking at the International Bar Association's 2014 Anti-Corruption Conference held in Paris at the beginning of June, Mr Green said it would be foolish for companies not to self-report in all those jurisdictions where criminality may have occurred. However, he added that on a number of occasions, cases had been dropped by other jurisdictions once the British or American authorities had become involved. He acknowledged that companies may find themselves in a difficult position if they have to report to multiple jurisdictions, all of which might treat self-reporting differently but emphasised that the SFO would expect companies to self-report, even if it was difficult. However, he offered his assurance that "these days, when we consider sending a request to a jurisdiction which may have human rights considerations attached to it, we will seek advice through the channels you would expect. If we felt sending a letter of request to a particular jurisdiction would jeopardise the safety of individuals, obviously we would not do it."

When it comes to deciding whether or not a DPA might be an appropriate way of dealing with wrongdoing, Mr Green stressed that a company's cooperation in any SFO investigation would be of paramount importance. He outlined the steps a company would need to be able to demonstrate:

disclosing the full extent of the problem, promptly

collecting data in a careful fashion – it should be "prompt, covert, coordinated and simultaneous" and should not tip off potential suspects

consulting the SFO on the methodology for searches of digital material (digital collections should be fully imaged and the back-ups preserved) and before interviewing key witnesses

waiving privilege where necessary

admitting guilt – while this was not required, it would be considered evidence of genuine cooperation.

Mr Green confirmed that DPAs would not be a rubber stamp. “Because you can only get a DPA [provided] the judge considers it to be in the interests of justice, the SFO cannot and will not shoehorn a case into a DPA when a corporate has been brought kicking and screaming into an acknowledgement of indictable conduct". However, he highlighted the court's role in the DPA process. "The judge will doubtless probe and test the circumstances and the facts as put before the court," he said. "Particular attention I have no doubt will be paid to whether the prosecution have properly applied appropriate public policy considerations."

UK: Government publishes response to whistleblowing framework call for evidence

The Government has published its response to the whistleblowing framework call for evidence. The call for evidence was commissioned last year to consider the question of whether the current UK whistleblowing framework is working. The report concludes with nine recommendations which the Government will implement as a package of legislative and non-legislative measures designed to address issues that were identified with the current framework.

Key recommendations are:

the Government will improve its guidance for whistleblowers and will suggest a best practice code of conduct for organisations and a model whistleblowing policy, although this will not be mandatory

regulatory bodies will be under a new duty to report annually on the whistleblowing disclosures they receive. The Government will consult further on the detail of what should be included in the report and how such reports should be published

financial incentives for whistleblowers will not be introduced - although the Government may consider whether financial or other incentives would be beneficial in specific situations

the Government will try to introduce a cultural shift in attitudes towards whistleblowing by encouraging a “celebration of whistleblowing”.

Overall these proposals are fairly “light touch” and do not go as far as many whistleblowing organisations had hoped, particularly in relation to expanding statutory whistleblowing protection to certain groups who are currently not covered, such as interns, job applicants and non-executive directors, although the Government has said it will keep this under review.

In November 2013, the Whistleblowing Commission published its Report which contained a recommended Code of Practice setting out good practice guidance in relation to whistleblowing arrangements in the workplace. It will be interesting to see to what extent the new non-statutory code of conduct reflects the Code of Practice drafted by the Whistleblowing Commission. It is proposed that the new Government guidance and non-statutory code of conduct will be completed by the end of 2014.

The new duty on regulators to produce annual whistleblowing reports will be introduced in the Small Business, Enterprise and Employment Bill which had its first reading in the House of Commons on 25 June 2014 and, if passed, is likely to come into force next year. We will continue to monitor the Government’s proposals for annual whistleblowing reporting, but it is clear from the response that the Government is aware of the need to maintain confidentiality where issues are reported to regulators.

US: US study suggests that a quarter of all public M&A deals are preceded by insider trading

A new study suggests that a large number of US public M&A deals are preceded by some kind of insider trading.

Academics at the Stern School of Business at New York University and McGill University have analysed stock option movements to determine if unusual activity took place in the 30 days prior to a deal's announcement. The study found that a quarter of all deals between 1996 and 2012 were preceded by some form of insider trading. The study was confident that the trading was performed based on the inside information as statistically, 'the odds of the trading "arising out of chance" were "about three in a trillion."'

As well as concluding that a quarter of all deals were preceded by insider trading, the study found that:

insider trading is more pervasive where target firms receive cash offers – likely because cash deals are more definitive

the bigger the deal and the higher the volume of trading in the shares of the company, the more likely there is to be insider trading

there appeared to be no correlation between the number of advisors on a deal and the level of insider trading.

The study suggested that law enforcement in the US was struggling to keep pace with the pervasive nature of insider trading – with only 4.7 % of suspicious trading being pursued by the Securities and Exchange Commission.